Polysar Limited is Canada’s largest chemical company. Its Rubber Group accounts for 46% of Polysar’s sales. The primary products for this group are butyl and halobutyl and the principal customers for these products are tire manufacturers. The rubber Group has two divisions: NASA (North America & South America) and EROW (Europe & elsewhere). There is product transferring between NASA and EROW and the Vice President of NASA is required to present the performance results to the Board of Directors and explain why the bottom line is lower than expected.

Performance of NASA Rubber Division

According to the above performance analysis, in September 1986, NASA rubber division reached a sale of $66 million which exceeded the budgeted sales by $4.7 million. NASA also generated a positive gross margin of $40 million which is $3.7 million higher than expected. However, they had a negative net contribution of $876 thousand, which is $2.8 million lower than budgeted.

As we see, the sales price per tonne is slightly below the budget. Since the sales volume is 8.5% higher than the budget, NASA has a favorable sales revenue variance.

Second, butyl rubbers were costed using standard rates for variable costs. The standard variable costs of $22,589 in actual column is the budgeted variable costs per ton times the actual volume of output. The variance of cost adjustment for variable costs is very small because feedstock standard cost is revised monthly. After adjusting to actual variable costs, NASA has an unfavorable variable costs variance of $840 thousand.

Therefore, the fixed costs allocated to finished goods and EROW are included in the line items of cost adjustments and spending variance. For volume variance, budgeted production of 55,000, (63.75-55)*700=6,125; actual production of 47,500, (63.75-47.5)*700=11,375. As a result, NASA has an unfavorable fixed costs variance of $6.6 million.

Finally, the performance report shows the NASA division operating at a loss. There is a significant volume variance from the actual versus budgeted standard fixed costs. The method of allocating fixed costs contributed to this large discrepancy.

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